Corporate Trade War Uncertainty and Patent Bubble

This paper draws upon resource dependence theory and investigates how trade policy uncertainty affects firm strategic innovation management in China. Adopting a machine learning approach called Word2Vec from computational linguistics, we construct and validate a measure of firm-level managers’ perceived trade war uncertainty (TWU). We find that TWU has a positive effect on the number of total patent applications, but this positive effect is totally driven by low-quality patents instead of high-quality patents. Moreover, we document that firms have stronger incentives for such strategic innovation behavior when the underlying firms are more financially constrained, and/or when the management is more myopic. In addition, we open the behavioral black box of firms’ strategic innovation and demonstrate that patents can be employed opportunistically to meet government policies to further attract more government subsidies.